Determining the market value of a company is not easy. Financial books have a simple way of calculating it, when the company’s revenue increases, the company’s market value increases. Companies that make a lot of money will be valued more by investors, usually one of the indicators used is the Price / Earning (P / E) ratio , as a standard to measure the company’s market value.
However, there are intangibles factors that also cause an increase in the market value of the company. General Electric (GE) ‘s history from 1980 to 2000 has increased revenue by 5.09 times from $ 25.5 billion to $ 129.9 billion. Received an increase in profits of 8.47 times from $ 1.5 billion to $ 12.7 billion. However, its market value has increased significantly by 34.1 times. The very high increase in the market value of this company was influenced by Jack Welch’s ability as CEO to lead. Not only is Jack Welch an expert at growing revenue, reducing costs and generating profits, Jack Welch is adept at communicating with the investor community and increasing GE’s market value.
Ernst & Young, a well-known business and financial consultant, has conducted interviews with a number of investors to find out how they use non-financial information to assess a company. There are at least eight measures used by investors in valuing companies:
- Execution of corporate strategy: is the ability of management to improve skills and expertise , and get commitment from employees that is in line with the vision of shareholders.
- Quality of strategy: strategy always involves a vision for the future, the ability to make important decisions, and allocate resources
- Ability to innovate: the ability to adapt to information technology and have strength in R&D.
- Ability to attract talented people: recruit, provide rewards, develop, and keep the best .
- Market share: present and future market share
- Quality of executives compensation, an executive is paid to achieve strategic goals.
- Quality of major process: the ability to manage company operations and the ability to change.
- Research leadership, the ability to create and use knowledge.
These eight measures are intangibles and they are all in the hands of a master builder. The leader of the company becomes like the celebrity, the more skilled at leadership and the more expensive the reward. This is where the importance of leadership which determines the market value of a company, even more broadly, the value of an organization, to the value of a country.
I once worked at Coca-cola and had a dialogue with Roberto C. Goizueta, the CEO of Coca-Cola who received a $ 80 million reward and all shareholders have no doubt because of his leadership qualities. Just like Jack Welch and other well-known corporate leaders, Goizueta is able to multiply market capitalization in value, because of its ability to see, manage and communicate the values of intangibles that persuade investors.